1. Markets fail when they under or over allocate resources of production or consumption, relative to the best interests of society. Market failure occurs due to four main factors: the existence of externalities, asymmetric information, the abuse of monopoly power, and inequalities and wealth and development. The existence of externalities means that the market mechanism does not always work efficiently. Markets run on a mechanism that only takes into account the private benefit and cost for a good. Besides the marginal private cost and marginal private benefit, there are the marginal social cost and marginal social benefit, which are external. As a result, governments must find responses to try to solve these market failures.

2. Externalities are the effects of market activities on other people that are external to the market. They are either positive externalities or negative externalities. When the social benefit of a good equates the social cost, it is known as the social optimum. Goods that have large positive externalities can either be public goods or merit goods. Public goods are non-rivalrous and non-excludable, while private goods, such as a merit good, are rivalrous and excludable. When a good has large positive externalities, the government should support its production. When a good has large negative externalities (demerit good), the government should limit or stop its production and consumption. Markets can fail in regard to externalities in four ways: lack of public goods, under provision of merit goods, over provision of demerit goods, and environmental degradation.

Graph 1 demonstrating MPB and MPC to the individuals participating in the market. Graph 2 demonstrating positive externalities, when the social benefit is added to the private benefits. This means that total demand for the product will be greater, because society will be willing to pay a higher price, for example, for beautiful buildings. Graph 3 demonstrating negative externalities, when the social cost is added to the private supply cost, giving a new supply curve, which raises the price and decreases the quantity.

3. Public goods are goods that are non-rivalrous and non-excludable. This means that the use of it by one person does not prevent the use of it by another, and also that people cannot be excluded from using the good. Public goods have very large positive externalities, but small private benefits, and this means that in a market system, they would barely be produced. This is defined as a market failure, and therefore, the government must find a solution to reallocate more resources of production to public goods.

4. To solve the market failure of lack of public goods, the government mainly uses one solution: the direct provision of public goods. This means that the government provides these services directly, paying for them using money from the taxation system. This is a way for everyone to receive the benefits of public goods. The problem with the method of direct provision is that it can be expensive, and also, there will always be the problem of ‘free-riders’, which benefit from the public good, yet do not pay a share of its cost. Another problem with this is that often, government is inefficient in its allocation of public goods, for example, between allocating too many resources to tanks than to police officers. Also, there might be inefficiency of government employees because the profit motive is not present.

5. Merit goods are private goods, which have large positive externalities. Due to the market system, the private optimum (equilibrium between private benefits and private costs) will be produced, instead of the social optimum. The government will want more produced because merit goods benefit other external people, despite it being a private good.

6. The government has three ways to allocate more resources towards merit...

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...Why do some marketsfail?
________________________________________________________
MarketFailureMarketfailure – occurs when the price mechanism causes an inefficient allocation of resources and a net welfare loss in society, so resources are not allocated to their best/optimum use. Identifying marketfailure is difficult because it involves making a value judgement aboutwhat is good and what is bad for an economy. However, it can be decided what is good or bad to society. Goods may be bad because of the nature of the good or because some goods are overprovided and over consumed whereas others are underprovided and under consumed.
Externalities
Externalities are costs or benefits which are external to a transaction – third party effects ignored by the price mechanism.
They are known as indirect costs and benefits or as spillovers from production or consumption of a good or service.
External costs are negative externalities and external benefits are positive externalities.
Social optimum equilibrium:
* Social optimum equilibrium occurs where the MSC equals MSB.
* The social cost of producing the last unit of output equals the social benefit from consuming it.
* At this point, welfare is maximised.
Private Costs:
* Producers concerned...

...Marketfailure arises when freely-functioning markets, fail to deliver an efficient allocation of resources. The result is a loss of economic and social welfare. Marketfailure exists when the competitive outcome of markets is not efficient from the point of view of society as a whole. However this is usually because the benefits that the free-market confers on individuals or businesses carrying out a particular activity diverge from the benefits to society as a whole
According to (N. Gregory Mankiw, 2007) Marketfailure is a situation in which a market left on its own fails to allocate resources efficiently”. Moreover, fail to allocate resources efficiently means that the benefit does not equal to the cost, or the demand does not meet the supply to make an equilibrium point. Furthermore, when a market cannot maximize the surplus available in market, it means that it is marketfailure. There are many reasons that cause the marketfail to allocate resources with reasonable efficiency. One of the reasons is externality. He stated, “Externality which is the impact of one’s person actions on the well-being of a bystander” (N. Gregory Mankiw, 2007) Likewise, when a bystander or an outsider influenced by consumer and...

...INTRODUCTION TO MICRO ECONOMICS
”MARKETSFAILURE”
Preface
The existence of the market have a very important function. For consumers, the market will make it easier to obtain goods and services daily needs. As for the manufacturers, the market becomes a place to facilitate the distribution process of goods production. In general, the market has three main functions, namely as a means of distribution, price formation, and as a promotion.
However, with the passage of the economic circulation, a lot of things that would happen imbalance in it. Which must all aim to make a profit as much as possible regardless of the result of the surroundings. Therefore there will be market imperfections or marketfailures in the run the all functions.
So I will tell various things that would pertain to the market mechanism and its failure to operate as well as the causes and solutions of marketfailure.
Contents
1.Market Definition and Function
The market is people who have a desire to be satisfied with money to spend and the willingness to spend it or it can be defined as a meeting place for buyers and sellers to conduct economic activity in the form of sale....

...Global Business Environment
Assignment 1
What is meant by marketfailure and howcan the government attempt to correct it?
Why do some marketsfail? Marketfailure is said to occur when the price mechanism is unable to allocate resources efficiently. Meaning that the forces of supply and demand lead to a net welfare loss in society, that the resources were not used to their maximum capacity. When there is marketfailure it is down to the government to correct them. Here are five way in which the marketcanfail
• Externalities
• Asymmetric information
• Monopoly market
• Public Goods
• Factor immobility
Externalities:
“The social optimum output or level of consumption diverges from the private optimum.” (tutor2u,n/a,n/a)
Externalities are external cost and external benefits which occur due to economic activity. However externalities do not involve the buyer or the seller in the purchase of a good or service, as they are only concerned about their private wants. But the effects are felt by the third party, these can be split into two sections. Positive and negative externalities.
Positive externalities:
This is when all the benefits of a good or service are not...

...What is meant by marketfailure and howcan government attempt to correct it?
Marketfailure occurs when there is no economic efficiency within a market. Whereas government intervention is put in use when a market may not always allocate scarce resources efficiently in a way that achieves the highest total social welfare.
Monopolies are one of the main causes of marketfailure. Monopolies are firms whom have eliminated all, if not, most competitors within that market leaving them with most control within that market.
The main reason why monopolies are negative within the economy is because they dictate pricing. After having eliminated most competitors, they then can start to charge whatever price they want for a product as the consumers can’t go elsewhere. As well as having increased the price of a product, they now have caused a limit in choice for the consumer. This is because the consumer can’t go for a cheaper product within that market as the monopoly has gotten rid of competition, thus leaving the consumer with high prices to pay at a limited choice.
Another reason is because monopolies only have profit maximisation in mind. Profit maximisation is when a firm determines the price and output level that returns the greatest profit. Although the firm is...

...CHAPTER 4
Market Efficiency and MarketFailure
1. Chapter Summary
Governments of over 200 cities in the United States have placed ceilings on the maximum rent some landlords can charge for their apartments. Some firms have coaxed governments into imposing price floors, which are legally determined minimum prices that sellers may receive. To understand the economic impact of government interventions in markets, it is necessary to understand consumer surplus and producer surplus.
Consumer surplus is the dollar net benefit consumers receive from buying goods and services at market prices less than the maximum prices they would be willing to pay. In a demand and supply graph, consumer surplus equals the area below the demand curve and above a horizontal line drawn from the price axis to the point on the demand curve that represents the market price. Producer surplus is the dollar net benefit producers receive from selling goods and services at prices greater than the minimum prices they would be willing to accept. In a demand and supply graph, producer surplus is equal to the area above the supply curve and below a horizontal line drawn from the price axis to the point on the supply curve that represents the market price. In a competitive market, the equilibrium price for a good or service occurs at the quantity of product where the...

...Hanna Jurkowska
Question 1
Economic inefficiency in the market arises when manufacturers do not supply the required type or quantity of a goods and services on the market which are demanded by consumers and that will lead to MarketFailure.
We can identify 3 causes of marketfailure:
1. Restricted Competition – The UK Government investigates and if necessary stops monopolies and mergers, cartels and restrictive trade practice, because good competition between companies (producers) leads to increased efficiency and prices of products are lower. If there is a restriction of competition by monopolies, mergers or restrictive trade practices we can observe that quality of goods and services are poorer, supplies are limited and there are lack of choices, sources are used inefficient and prices are higher.
2. Public goods - Government has to provide public goods and raise revenue from general taxation.
The public goods like defence, lighthouse or street lighting are generally provided for all citizens and cannot exclude anyone from their consumption. So each one of these goods and services are used by consumers without diminution amount available to others and also they cannot choose to not consume them.
Because it is impossible to exclude individuals or groups of people from the consumption of these goods as a result no one pays for them...

...MarketFailureMarketfailure occurs when the market system is unable to achieve an efficient allocation of resources
Positive Externalities
Definition of Positive Externality.
This occurs when the consumption or production of a good causes a benefit to a third party.
•For example, when you consume education you get a private benefit. But there are also benefits to the rest of society. E.g you are able to educate other people and therefore they benefit as a result of your education.
A farmer who grows apple trees, provides a benefit to a beekeeper. The beekeeper gets a good source of nectar to help make more honey.
Therefore with positive externalities the benefit to society is greater than your personal benefit.
Therefore with a positive externality the Social Benefit > Private Benefit
• Remember Social Benefit = private benefit + external benefit.
Diagram of Positive Externality
• In a free market consumption will be at Q1 because Demand = Supply (private benefit = private cost )
• However this is socially inefficient because Social Cost < Social Benefit. Therefore there is under consumption of the positive externality
• Social Efficiency would occur at Q2 where Social Cost = Social Benefit
For example In the real world without govt intervention there would be too little education and public transport.
Negative Externalities
• Negative externalities occur...

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